Question
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Brief Exercise 16-4 Marigold Corporation issued 1,800 $1,000 bonds at 102. Each bond was issued with...
Brief Exercise 16-4
Marigold Corporation issued 1,800 $1,000 bonds at 102. Each bond
was issued with one detachable stock warrant. After issuance, the
bonds were selling in the market at 99, and the warrants had a
market price of $33.
Use the proportional method to record the issuance of the bonds and
warrants
Solutions
Expert Solution
Issue price = 1,800 x $1,000 x 1.02 = $1,836,000
Market value of bonds after issuance = 1,800 x $1,000 x .99 = $1,782,000
Market price of warrants after issuance = 1,800 x $33 = $59,400
Therefore,
Total fair market value of the bonds and warrants after issuance = $1,782,000 + $59,400 = $1,841,400
Allocate the issue price of $1,836,000 to bonds and warrants on the basis of their fair market values.
Issue price allocated to bonds = $1,836,000 x $1,782,000/$1,841,400 = $1,776,774
Issue price allocated to warrants = $1,836,000 x $59,400/$1,841,400 = $59,226
Record the issuance through the following journal entry:
| Account Titles and Explanation | Debit | Credit |
| Cash | 1,836,000 | |
| Discount on Bonds Payable ($1,800,000 - $1,776,774) | 23,226 | |
| Bonds Payable | 1,800,000 | |
| Paid-in Capital - Stock warrant | 59,226 |
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